Demand for World Bank Lending

July 2001IBRD and IDA lending commitments appear to reflect variations in borrowing countries' need for external financing to meet debt service commitments. This is true during both financial crises and more tranquil times, suggesting that aid may be more fungible than previously believed.Bridging the external financing gap has been an important factor in borrowing government's demand for World Bank loans. The demand for IBRD and IDA lending is positively related to an increase in debt service payments and inversely related to a borrowing country's level of reserves.These two variables explain a large part of the variation in IBRD and IDA lending commitments, not only since the Asian crisis but also during tranquil times over the past two decades. Borrowing to service debt during a crisis is consistent with the Bank's role as a lender of last resort as well as with its core development objectives, but such borrowing during tranquil times may conflict with the Bank's long term objective of reducing poverty.That investment lending commitments are related to debt service payments implies that aid may be more fungible than previously believed. If Bank lending is fungible and there is no guarantee that a particular Bank loan is financing an identified investment project or program, a case could be made for greater use of programmatic lending (with well-defined conditionality). As developing countries become larger and more integrated with volatile international capital markets, there is also likely to be a greater need for fast-disbursing, contingent program lending facilities from the Bank.This paper - a product of the Economic Policy and Prospects Group - is part of a larger effort in the group to understand the determinants of official flows to developing countries. The author may be contacted at dratha@worldbank.org